Chandler Co

question 74

Multiple Choice

Chandler Co.'s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%.The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Chandler's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t − 1) × 0.1%, where t = number of years to maturity.What is the default risk premium (DRP) on Chandler's bonds?

• A) 0.99%
• B) 1.10%
• C) 1.21%
• D) 1.33%
• E) 1.46%

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Definitions:

Market

A system or arena in which commercial dealings are conducted, often defined by the goods or services available for trade.

Externalities

Financial outcomes or repercussions that impact third parties who are not directly involved; these can be positive or negative.

Invisible Hand

A term coined by Adam Smith to describe the self-regulating nature of the marketplace in adjusting supply and demand autonomously.

Marketplace

A physical or digital venue where buyers and sellers come together to exchange goods, services, or information.